Sign of Strength or Evidence of Weakness? China’s Dollar Reserves

At key points then, China shied away from the decisions that would have allowed it to avoid accumulating so many reserves. China’s leaders probably didn’t intend to accumulate $2 trillion in reserves, but they weren’t willing to make the policy choices needed to change China’s growth trajectory either.

And now China has a problem. Its dependence on exports meant that it ended up importing unemployment from the rest of the world just when China’s own property boom soured. And it so happened that the costs of relying on exports for growth became obvious at the same time that the costs of accumulating more reserves than China needs also became very visible.

China’s leaders likely hoped big investment gains would help offset their currency losses. Now, though, they realize that they bought equities and other risk assets at the top of the market, and thus added to their losses. China’s leaders have noted the criticism that has been directed at the CIC. They now that fessing up to additional losses won’t be popular.